So, you own a startup company and you’re looking for investors to help fund your business. You excel in your field but you’re not exactly an A+ student when it comes to raising capital.
Don’t despair. Regulation A+, adopted by the Securities and Exchange Commission effective this past June, could be the solution you’re looking for. The ruling does not necessarily make it easy to raise funds, but is designed to make it easier. An update to the JOBS Act (Jumpstart Our Business Startups), it revises and expands the original Regulation A, now referred to as Regulation A+.
The ruling has relaxed legal requirements for companies seeking and receiving funding from members of the “crowd,” not just wealthy parties or banks. “Simply put, this SEC regulation is designed to make it easier for investors and startups to work together,” says Jeffrey Neu, a Jersey boy from Red Bank who became an attorney, investor, entrepreneur, and world traveler.
Neu will discuss the impact of these new regulations and explain how companies can best take advantage of them at the New Jersey Entrepreneurial Network on Wednesday, October 7, from noon to 3 p.m. at the Princeton Marriot, College Road East, Price: $50. Register online by October 5 at www.njen.com. For more information, call 973-451-1100. Neu’s talk is titled “Raising Capital with Crowdfunding: Are the New SEC Rules the Answer to Your Prayers?”
Thanks to the SEC’s updated exemption ruling, small businesses can now offer and sell up to $50 million in a 12-month period, from both non-accredited investors (a party whose net worth is less $1 million and who earns less than $200,000 per year) and accredited investors.
However, the benefits of Regulation A+ are not available to just anyone wishing to raise funds. As a potential recipient, your first step is determining whether you pass the initial qualification. If you are seeking capital as a company, probably yes. If you are aiming to fund a project as an individual, definitely no.
“The term ‘crowdfunding’ can be deceptive,” says Neu. People tend to associate crowdfunding with sources like Kickstarter where individuals can seek funding from investors by promising rewards: products, upgrades, and “goodies” like T-shirts. But funding through Regulation A+ is only available to companies offering securities, a stake in their company. In other words, fundraising through Kickstarter is rewards based and funding through the SEC’s Regulation A + is equity based.
So, let’s assume you own a company looking to raise funds. Your next step is to decide whether to seek funding through Tier 1 or Tier 2.
Under Tier 1, you can raise up to $20 million per year from both unaccredited and accredited sources, and there are no limits on how much a funder can invest. The SEC requires accountant-reviewed financials but audits are not needed. In most cases, ongoing reporting is not required. Relatively speaking, the SEC requirements are moderate.
However, startups are required to comply with state regulations (known as “blue sky” laws), not just in your state but every state where you plan to raise money. If you’re looking for investors from all 50 states, you will be paying fees and abiding by the rules of each and every one of them. That said, if you plan to look for investors from only one or two states and are not aiming for more than $20 million a year, Tier 1 could be a good choice.
Under Tier II, you can raise up to $50 million per year from both unaccredited and accredited sources. But access to a higher funding amount comes with additional requirements from the SEC. You must provide two years of audited financials and comply with ongoing reporting requirements after you raise the funds. Also, non-accredited investors cannot invest more than 10 percent of the greater of annual income or net worth.
The good news for you as the fundraiser is that you do not need to comply with state regulations. Tier II would be your option if you seek to raise up to $50 million, and it could be a good choice if you plan to look for investors from several states.
Neu believes the future looks good for Regulation A+. “It allows nontraditional investors to invest in smaller companies. Some people think that a person who does not make $200,000 a year or has less than $1million in assets is not sophisticated enough to make investments. I don’t agree. Making markets accessible to the less wealthy is a good thing.”
Neu’s confidence comes from 20 years of experience working with new companies, technology, and law. He is a co-founder at Kuzas Neu: Technology, Media and Internet Law. He is a managing partner at the Hatchery-B2B Ventures in New York where he and team members incubate startups by finding customers, forming founding teams, building the product, and supplying funding.
He has been selected as the Young Lawyer of the year by the New Jersey State Bar Association and has served as chair of the Computer and Internet Committee for the NJSBA.
His law firm, Kuzas Neu, is located in Red Bank, the town where he grew up. His mother was a professionally trained organist and his father worked for Air France. “He worked in human resources before Human Resources was invented,” Neu says.
Prior to becoming a lawyer, Neu held several professional positions. He co-founded a development firm in Australia focusing on mobile technology and wireless content delivery, one of the first companies to produce an application for rich content bi-directional mobile media publishing.
Neu also worked for the United Nations High Commissioner for Refugees, focusing on Asian Pacific Governments. In 2004 Neu co-founded CharityHelp International, a non-profit organization working for women’s rights and education, and children in orphanages.
He holds a law degree from Rutgers, Camden, and a masters certificate in Peace and Conflict Studies from the University of Sydney. He has also studied at the University of Utah, the Christian Albrecht Universitaet in Germany, and the Hebrew University in Israel.
If you are the current or soon-to-be founder of a startup, you have likely considered the need for capital and potential investors. But, have you identified the person or company who will buy your product? If not, that’s what you need to do now. Says Neu: “You need to identify your customer and his needs. If you can do that, everything else will flow naturally.”